LIBRARY 

OF  THE 

UNIVERSITY  OF  ILLINOIS* 


Fire  Insurance  Monographs 


State  Fire  Insurance  Board 

. . ' ■ t . - 

With 

Graphic  Charts 


(By 

GEORGE  H.  HOLT 


THIRD  EDITION-REVISED 

Holders  Union,  C 

No.  851  B 


Proof  of  Profit 

Graphic  Chart  No.  I 

Geo.  H.  Holt 

y BRAKY 

UNIVERSITY-  Of 

LATEST  FINANCIAL  SHOWING 

All  United  States  Stock  Fire  Insurance  Companies 
Reporting  to  Connecticut,  1911 


Capital  (including  Stock  Dividends) 


Book  value, 


Market  value 


Profit 


.$68,200,000 

$191,600,000 

$214,400,000 

$144,200,000 


Compiled  from  the  Spectator  Tables  and  current  market  reports. 
All  losses  of  every  kind  are  taken  into  the  account  in  these  figures. 


Proof  of  Profit 


Graphic  Chart  No.  II 
Geo.  H.  Holt 


RECORD  SINCE  ORGANIZATION 

Of  All  United  States  Stock  Fire  Insurance  Companies 
Reporting  to  Connecticut,  1911 


| Contributed  Capital $56,000,000 

| Stock  Dividends $12,200,000 


Cash  Dividends  paid $269,600,000 


Cash  Dividends  paid $269,600,000 

Stockholders’  showing  since  organization $465,300,000 


All  losses  and  expenses  of  every  kind  accounted  for. 


See  Graphic  Chart  No.  1. 


Capital  (as  above) $68,200,000 

Market  value $214,400,000 

Profit  on  Stock  alone $144,200,000 


fSMr13 


Proof  of  Profit 


Graphic  Chart  No.  Ill 
Geo.  H.  Holt 


SPECTATOR  TABLES 

1901  - 1910 

Includes  all  Conflagrations  and  all  Companies 


i/'t 


JR 


This  is  the  amount  that  the  Stockholders  put  up  in 

Cash  and  Stock  Dividends $80,000,000 


This  is  the  amount  that  the  Policyholders  got  for  Losses 

in  10  years $1,523,000,000 


This  is  the  amount  that  the  Policyholders  did  not  get.  .$1,485,000,000 


EXPENSES  OTHER  THAN  DIVIDENDS 


CASH  DIVIDENDS 


SURPLUS 


Capital  and  Surplus  now  on  hand $277,000,000 

Capital 80,000,000 

Gain  in  Surplus $197,000,000 


p 


3 


Proof  of  Profit 


Graphic  Chart  No.  IV 
Geo.  H.  Holt 


SPECTATOR  TABLES 

All  Foreign  Companies  (28) 

Licensed  in  Connecticut  Prior  to  1910 

Sent  to  U.  S.  from  Home  Offices,  1909-1910 $4,176,447 

Remitted  to  Home  Offices  from  U.  S.,  1909-1910 $15,332,232 

Net  amount  sent  abroad,  28  companies,  1909-1910 $11,155,785 

Note  the  net  gain  for  two  years  only. 


4 


Proof  of  Profit 


Graphic  Chart  No.  VI 
Geo.  H.  Holt 


GAIN  AND  LOSS  EXHIBIT 


All  United  States  Stock  Fire  Insurance  Companies 
Reporting  to  Connecticut,  1911 
Except  Spring  Garden 


Premiums  Received  since  Organization $3,400,000,000 


Losses  Paid  since  Organization 


$1,900,000,000 


Balance  unaccounted  for.  What  became  of  it? 


$1,500,000,000 


Capital  of  these  same  Companies 


$68,200,000 

I 


This  Chart  shows  all  fire  losses — conflagration  and  ordinary — and 
a balance  of  premiums  received  of  FIFTEEN  HUNDRED  MILLION 
DOLLARS,  on  a Capital  of  $68,200,000.  No  account  is  taken  here 
of  any  income  from  Investments  or  Banking.  That  would  be  ad- 
ditional. 


5 


State  Control  of  Fire  Insurance 

Statistics  and  Argument  in  Support  of  the  Creation 
of  a State  Fire  Insurance  Board 


Presented  to  the 

Illinois  Insurance  Legislative  Committee 

By 

George  H.  Holt 

Chicago,  January  25  and  31,  Revised  March  25,  1912 


KENTUCKY  LEGISLATION 

The  Board  of  Trade  of  Louisville,  Kentucky,  having  failed  dur- 
ing more  than  three  years  to  secure  consideration  from  the  Board 
of  Underwriters  for  the  improvement  in  the  fire  hazard  of  Louis- 
ville, which  had  resulted  from  the  expenditure  of  more  than 
$600,000  in  the  improvement  of  the  water  supply  and  fire  protec- 
tion of  that  city,  decided  to  ask  the  Legislature  to  establish  a State 
Fire  Insurance  Board. 

Senate  Bill  No.  21,  introduced  by  Senator  Hogg,  January  11, 
1912,  is  submitted  herewith  for  your  consideration. 

This  measure  was  argued  before  the  Joint  Committee  of  the  Sen- 
ate and  House  on  Tuesday,  January  23,  and  unanimously  recom- 
mended for  passage.  It  was  passed  by  the  Senate,  January  30,  by 
a unanimous  vote,  32  to  0 ; and  by  the  House,  February  16,  by  a vote 
of  78  to  7,  with  minor  amendments.  Senate  concurred,  32  to  1,  Feb- 
ruary 19.  Total  vote  110  for ; 8 against. 

(The  bill  was  signed  by  the  Governor  March  4,  with  the  emergency  clause. 
The  members  of  the  Board  were  appointed  March  19  and  the  first  meeting  of  the 
Board  was  held  March  21,  so  that  the  Law  is  now  in  operation.) 

The  insurance  interests  were  presented  by  representatives  from 
Chicago,  from  Louisville,  and  from  the  State  of  Kentucky  &t  large 
and  elsewhere. 

The  business  organizations  and  the  press  throughout  the  state 
favored  the  bill. 

I beg  to  submit  the  following  for  your  consideration  in  support 
of  the  adoption  of  a similar  measure  in  the  State  of  Illinois. 


6 


ARGUMENT  BEFORE  COMMITTEE 

January  25,  1912. 


The  Legislature  of  Illinois  is  the  only  organized  representative 
of  the  unorganized  citizens  of  Illinois. 

The  fundamental  and  constitutional  conception  of  its  purpose 
and  service  is  that  it  should  regulate  the  action  of  its  citizens,  and 
all  those  temporarily  resident  within  its  borders  in  the  interest  of 
the  community  without  depriving  any  individual  of  his  just  rights 
and  liberties. 

It  controls  and  jealously  guards  the  right  of  taxing  the  property 
of  its  citizens  for  public  purposes  and  jealously  guards  the  expendi- 
ture of  the  fund  collected  by  taxation  in  the  interest  of  the  com- 
munity. 

Mr.  A.  F.  Dean  says: 

“Everybody  admits  that  fire  insurance  premiums  are  a tax, 
levied,  assessed  and  distributed,  it  is  true,  by  private  enter- 
prise, but  no  less  a tax. 

“The  citizens  of  each  state  have  an  undoubted  right  to  know 
that  in  the  apportionment  of  the  fire  tax  among  the  several 
states,  they  are  not  being  forced  year  after  year  to  pay  a tax 
that  leaves  a notably  larger  margin  of  profit  on  the  aggregate 
premiums  invested  than  the  profits  from  other  sources.’ ’ 

This  insurance  tax  is  now  levied  and  collected  and  expended 
by  private  interests  for  their  own  profit.  Henry  Evans,  of  the 
great  Continental  Fire  Insurance  Company,  states:  “It  is  a busi- 
ness organized  and  conducted  for  profit;”  and  if  he  had  not  said 
so,  every  sane  man  knows  that  it  is  so. 

If  the  insurance  men  were  the  most  unselfish  and  superhuman 
in  the  world  and  professed  to  be  the  only  people  who  had  the 
knowledge  and  integrity  to  levy  an  involuntary  tax  upon  the  prop- 
erty and  commerce  of  the  people  of  the  United  States  to  the  extent 
of  hundreds  of  millions  of  dollars  per  annum;  and  if  it  were  known 
that  up  to  this  time  they  had  executed  this  trust  in  a manner  above 
reproach,  tested  and  proved  by  an  audit  of  disinterested  experts; 
and  if  no  intelligent  body  of  men  could  be  found  to  challenge  such 
a statement,  do  you  think  for  a moment  that  the  people  of  Illinois 
and  of  forty-six  other  states  would  vote  to  continue  that  trust  on- 
ward from  today  in  the  hands  of  these  same  underwriters? 

If  these  particular  men  are  so  superior  in  intelligence  and  in- 
tegrity and  unselfishness  that  they  can  be  trusted  to  administer  this 
vast  power  of  taxation  without  regulation  and  without  representa- 
tion upon  the  part  of  the  property  owners,  why  not  abandon  every 
other  form  of  taxation  to  their  control  and  allow  them  to  exercise 
their  sweet  will  in  the  matter  of  how  it  shall  be  expended  and  who 
shall  receive  the  benefits  from  it? 

It  certainly  is  an  economic  waste  to  maintain  a multiplicity 
of  organizations  for  the  levying  and  collecting  and  expendi- 


7 


ture  of  taxation  in  the  several  states  so  long  as  we  have  at  hand  the 
organized  body  of  underwriters  who  are  so  superior  to  every  human 
limitation,  and  are  infallible  in  the  administration  of  justice  and 
equity  between  individuals  and  communities  and  their  own  pocket- 
books. 

FUNDAMENTAL  QUESTIONS 

Have  the  people  of  Illinois  a right  to  a hearing  of  their  side 
of  the  case? 

Is  it  a square  deal  to  give  a private  organization,  designed  for 
profit,  the  power  of  the  combined  assessor,  the  tax  collector,  the  judge 
and  the  sheriff? 

It  has  certainly  been  found  necessary  to  curb  the  activities  of 
the  insurance  companies  in  some  directions.  It  has  been  found 
advisable  to  keep  watch  upon  their  financial  statements.  The  courts 
are  full  of  cases  in  which  the  private  citizen  is  seeking  to  recover 
something  that  the  insurance  man  is  withholding  from  him.  The 
insurance  men  themselves  are  protesting  that  the  business  is  un- 
profitable and  that  it  is  hampered  and  interfered  with  in  nearly 
every  state.  Insurance  men  denounce  each  other  and  organize  sep- 
arate clans  with  a view  to  increasing  their  proportion  of  profit  as 
compared  with  other  clans. 

Why  should  the  people  of  Illinois  be  deprived  of  rights  which 
the  people  of  other  states  enjoy?  Are  the  underwriters  of  Illinois 
so  much  superior  to  the  other  citizens  of  Illinois  that  they  ought 
to  be  entrusted  with  the  power  of  confiscating  the  private  property 
of  the  citizens  at  their  own  pleasure  for  their  own  profit? 

The  question  before  the  Legislature  of  Illinois  is  not  whether  a 
particular  rate  or  a class  of  rates  is  out  of  line,  whether  the  clerks 
and  employes  of  the  underwriters  are  competent  and  acccurate  and 
honest,  or  whether  a particular  interest  is  being  favored  and  other 
interests  are  being  penalized.  These  are  the  very  questions  that  a 
Rating  Board  should  deal  with  upon  the  basis  of  evidence.  A 
Committee  of  the  Legislature,  or  even  the  Legislature  itself,  will 
not  undertake  to  settle  in  detail  the  rights  and  equities  of  the  par- 
ties in  particular  cases,  in  the  absence  of  dependable  evidence  and 
investigation. 

If  the  companies  are  honestly  convinced  that  they  have  not 
made  money,  or  have  made  too  little  money,  is  that  a convincing 
reason  for  a continuation  of  existing  conditions? 

If  we  credit  their  statement,  we  certainly  discredit  their  man- 
agement. 

We  have  a right  to  know  whether  the  claim  is  “bona  fide,”  or 
whether  it  is  designed  to  deceive  the  unwary. 

We  have  a right  to  know  whether  mismanagement,  or  criminal 
action  or  intent,  either  on  the  part  of  the  insured  or  the  insurer, 
or  whether  the  inadequacy  of  rates  is  responsible  for  the  condition 
of  no  profit. 


8 


If  you  will  read  the  entire  report  of  the  New  York  Investigat- 
ing Committee,  and  especially  the  thousands  of  pages  of  testimony 
which  are  printed  separately  from  the  report,  you  will  find  the  ex- 
isting system  of  underwriting  condemned  at  almost  every  point, 
not  only  by  the  Committee  but  by  the  Underwriters  testifying  be- 
fore the  Committee. 

Even  if  it  were  true  that  the  New  York  Committee  recommended 
only  certain  things  for  New  York  State,  is  that  any  reason  why 
the  Legislature  of  Illinois  should  do  nothing? 

A State  Rating  Board  in  Illinois  could  investigate  the  under- 
lying conditions  in  New  York,  and  the  results  of  the  investigations, 
and  the  New  York  laws,  and  the  differences  in  schedules  and  prac- 
tices in  New  York,  and  apply  that  information  in  the  service  of 
the  State  of  Illinois. 

They  will  find  not  only  the  laws  of  New  York,  but  the  adminis- 
tration of  its  Insurance  Department,  far  more  controlling  than  any- 
thing that  has  been  attempted  in  Illinois. 

They  will  find  rates  and  practices  in  New  York  far  more  ad- 
vantageous for  the  property  owner  than  in  Illinois. 

They  will  find  the  loss  ratio  in  New  York  far  higher  in  propor- 
tion to  premium  than  in  Illinois,  and  still  all  of  the  companies  want 
to  do  business  in  New  York  at  the  lower  premium  rates  and  the 
higher  loss  ratio. 

Why  should  Illinois  be  deprived  of  all  these  advantages? 


GAIN  AND  LOSS  EXHIBIT 

I hand  you  herewith  (table,  page  10)  the  tabulated  summaries  of 
the  Gain  and  Loss  Exhibits  in  the  States  of  Connecticut,  New  York 
and  Massachusetts,  for  the  years  1909  and  1910,  and  combined. 

These  are  the  latest  published  statistics,  and  are  the  official  fig- 
ures, taken  from  the  State  Reports  of  the  Company  Reports  upon 
the  Convention  Report  form. 

They  disprove  the  claim  that  there  is  “no  profit  in  the  business. ’ 9 
They  show  the  necessity  of  disinterested  and  competent  audit  of  com- 
pany figures  before  they  should  be  accepted  as  true. 

The  reports  show  the  total  business  of  the  companies  reporting 
to  these  states.  The  smallest  number  of  companies  reporting  is  154, 
in  Connecticut  in  1909 ; the  largest  number  is  232,  in  Massachusetts, 
1910.  Every  Company  reporting  gives  almost  exactly  the  same  fig- 
ures for  its  individual  Company  to  each  of  the  states.  The  differences 
are  easily  accounted  for,  but  are  unimportant  for  this  purpose. 

These  tabulations  disprove  and  discredit  THE  SPECTATOR, 
the  Jenney  and  the  Law  tables  of  compiled  company  experience,  as 
a basis  of  rate  making. 


9 


GAIN  AND  LOSS  EXHIBIT  TABULATIONS 


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10 


COMBINED  EXPERIENCE:  1909  AND  1910 


(Expressed  in  Millions) 


Conn. 

N.  Y. 

Mass. 

Risks  in  force  (average) 

39,334 

42,616 

(not  given) 

Premiums  earned 

479 

554 

580 

Underwriting  gain 

34  < 

31 

72 

Investment  gain 

35 

42 

40 

Combined  gain 

69 

73 

112 

Carried  to  surplus 

34 

40 

39 

Margin  paid  out  in  dividends  and 
otherwise  (except  expense  items) 

35 

33 

73 

Dividends  to  Stockholders  and  Mutual  Policy 

Holders  included. 

BURNING  RATIO 

Losses  incurred  upon  $100  at  risk : 


1909  1910  Combined 

Connecticut 316  .321  .318 

New  York 341  .346  .344 


Massachusetts  (not  reported). 

A ratio  of  50c  per  $100  is  normal,  as  per  Insurance  Companies’ 
published  standards. 

The  above  difference  ought  to  be  looked  into  in  the  public  interest. 


Rate  of  premium  earned  upon  amount  at  risk: 


Massachusetts  60 

New  York 65 


This  differs  amazingly  from  the  National  Board  figures. 


Losses  incurred  to  premiums: 


Connecticut  52.17 

New  York 55.05 

Massachusetts 49.88 


This  reflects  the  higher  loss  ratio  in  New  York  than  in  the  other 
two  states.  But  even  that  ratio  is  below  the  60%  standard  of  Loss 
to  Premium. 

The  whole  country  experience  is  therefore  below — not  above — 
the  expected  by  a large  margin. 

The  Companies  had  the  money. 

What  did  they  do  with  it? 


li 


Proof  of  Profit 


Graphic  Chart  No.  V 
Geo.  H.  Holt 


GAIN  AND  LOSS  EXHIBIT 


Banking  Department 


The  companies  claim  that  they  make  no  money  out  of  Underwrit- 
ing, but  make  their  large  earnings  out  of  the  “Banking  Department.” 

Compare  the  combined  earnings  as  below: 


Underwriting  (millions) 

Investment  income  earned, 


Conn. 

N.  Y. 

Mass. 

34 

31 

72 

53 

61 

62 

That  shows  a large  gain  from  underwriting,  but  still  larger  gain 
from  investments. 

Compare,  however,  the  amounts  shown  in  surplus: 


Underwriting  gain  in  surplus 
Invested  gain  in  surplus 


Conn. 

N.  Y. 

Mass. 

34 

31 

72 

35 

42 

40 

From  Underwriting  (Conn.)  $34,000,000 


From  Investments  (Conn.) . . $35,000,000 


Combined  gain  in  surplus,  three  states : 


From  Underwriting  $46,000,000 


From  Investments  $39,000,000 


12 


Proof  of  Profit 


Graphic  Chart  No.  V-a 
Geo.  H.  Holt 


GAIN  AND  LOSS  EXHIBIT 


Banking  Department — Continued 


Note  the  losses  in  investments  which  have  come  out  of  invest- 
ment earnings: 


Conn. 

N.  Y. 

Mass. 

Investment  income  earned 

53 

61 

62 

Investment  gain  in  surplus 

35 

42 

40 

Loss  in  investments 

18 

19 

22 

Earned  (Conn.)  $53,000,000 


Carried  to  Surplus  $35,000,000 


Shrinkage 


$18,000,000 


In  other  words,  the  loss  on  sales,  or  upon  shrinkage  of  value,  in 
investments  approximates  $20,000,000,  which  is  now  shown  as  taken 
out  of  Investment  Earnings.  This  is  for  two  years  experience. 

What  item  was  it  taken  out  of  during  all  the  years  in  which  the 
companies  were  not  required  to  report  the  Investment  Department 
gains  and  losses? 

Where  did  the  Investment  Department  expenses  appear  in  those 
older  reports  which  are  now  utilized  to  show  that  in  a long  term  of 
years  there  has  been  no  profit  in  underwriting? 


13 


We  have  a right  to  be  shown  that  the  tabulations  of  a long  term 
of  years  which  are  presented  as  an  argument  against  State  Rating, 
contain  facts  and  figures  which  are  germane  to  the  subject  and 
which  are  so  correlated  to  existing  conditions  and  prospective  con- 
ditions as  to  be  in  any  measure  controlling. 

These  are  problems  which  should  be  left  to  the  deliberate  and 
authoritative  determination  of  a State  Rating  Board,  subject  to 
review  by  judicial  authority.  This  is  the  meaning  of  the  State 
Rating  Bills  now  proposed,  and  under  their  provisions  no  injustice 
will  fall  upon  any  individual  or  class.  Can  this  be  said  of  exist- 
ing conditions? 

It  is  a far  safer  thing  for  the  insurance  companies,  if  their 
purpose  is  to  deal  justly,  to  submit  their  case  to  such  a Board  than 
to  submit  it  to  a temporary  Committee  of  any  sort  which  lacks  the 
safeguards  afforded  by  this  Bill. 

If  their  case  is  too  weak  to  stand  the  light  of  day  when  safe- 
guarded as  provided  in  the  Kentucky  Bill,  it  certainly  is  too  weak 
to  risk  the  snap  judgment  of  any  disinterested  group  of  citizens. 


DISCREDITED  STATISTICS 

The  statistics  submitted  by  the  underwriters  ought  not  to  he  ac- 
cepted without  full  investigation.  They  have  been  discredited  over 
and  over  again,  and  will  be  discredited  by  your  Committee  upon 
investigation. 

They  deal  with  facts  and  conditions  in  the  distant  past,  and  with 
companies  and  methods  long  since  defunct.  They  have  not  been 
tabulated  upon  any  approved  system  designed  to  disclose  the  facts 
in  the  public  interest. 

Within  the  past  two  years  the  companies  have  been  required  to 
report  to  certain  of  the  states  a new  tabulation,  called  the  Gain 
and  Loss  Exhibit,  or  sometimes  called  the  Underwriting  and  In- 
vestment Exhibit.  We  have  now  in  printed  form  two  years  of  re- 
ports of  this  kind  for  more  than  two  hundred  companies,  and  these 
exhibits  totally  discredit  and  disprove  the  previous  tabulations  and 
summaries  of  published  results. 

The  difference  disclosed  between  the  tabulations  of  the  Gain 
and  Loss  Exhibits  and  the  previous  standard  tabulations,  designed 
by  the  companies  for  their  private  ends,  is  a matter  of  enormous 
sums  of  money.  It  is  no  trifling  percentage,  but  an  appalling  sum. 
These  facts  are  known  to  the  insurance  men  themselves,  and  still 
they  publish  and  offer  you  the  discredited  statistics. 

Your  Committee  has  not  the  time,  nor  is  it  desirable  from  any 
standpoint,  that  it  should  undertake  to  investigate  and  pass  upon 
the  credibility  or  accuracy  of  this  mass  of  statistics.  That  work 


14 


should  be  left  to  the  State  Rating  Board  and  its  organization,  de- 
signed and  equipped  for  the  purpose  and  bound  to  do  the  work 
impartially. 

What  do  the  Underwriters  fear? 

If  they  have  anything  to  fear  from  investigation,  is  not  that  all 
the  more  reason  why  the  state  should  be  given  the  right  to  investi- 
gate? It  is  well  known  to  your  Committee  that  other  states  have 
exercised  this  right. 

If  your  Committee  will  investigate,  they  will  find  that  a large 
number  of  bills  have  been  passed  covering  the  different  subjects. 
Superintendent  Hotchkiss,  of  New  York,  has  held  that  the  New 
York  bills  give  him  the  power  to  supervise  and  regulate  rates,  and 
he  has  assumed  and  is  exercising  that  authority. 


ILLINOIS  EXPERIENCE 

For  purpose  of  comparison,  note  the  loss  ratio  in  Illinois  for  the 
same  years  as  given  in  the  Spectator  compilation  entitled  “Distribu- 


tion by  States  of  Fire  Insurance,  1911  Edition.” 

Losses  incurred  to  Premiums  in  Illinois,  1909 45.7% 

Losses  incurred  to  Premiums  in  Illinois,  1910 50.4% 

The  above  is  for  Stock  Companies  only. 

Mutuals,  1909 53.2% 

Mutuals,  1910 54.7% 

Grand  totals  for  Continent,  1910 49.7% 


15 


SPECTATOR  TABLES 

See  Graphic  Chart  No.  Ill 


Take  another  set  of  figures,  compiled  from  THE  SPECTATOR 
Year-Book,  for  ten  years’  experience  from  1901  to  1910,  inclusive,  as 
follows : 


Capital  (average)  $ 80,000,000 

Net  surplus  (average)  197,000,000 

Total  income  3,055,000,000 

Paid  for  losses 1,523,000,000 

Paid  for  dividends  240,000,000 

Expenses  other  than  losses  and  dividends 968,000,000 

Average  number  of  Stock  Companies. . 323 

Average  number  of  Mutual  Companies  234 


Total  557 


In  other  words,  on  a capital  of  $80,000,000,  and  an  accumulated 
net  surplus  of  $197,000,000  they  have  paid  dividends  of  $240,000,000 ; 
have  divided  up  among  themselves  in  salaries  and  expenses  and  en- 
tertainment, etc.,  $968,000,000. 

These  are  the  figures  in  THE  SPECTATOR  Year-Book,  and  un- 
til you  juggle  with  them,  they  show  this  condition  of  things. 

They  include  all  of  the  recent  conflagrations,  San  Francisco, 
Baltimore,  Toronto,  Rochester,  Paterson,  Chelsea,  and  many  others. 
Think  of  that  a moment ! These  profits  are  over  and  above  all  losses, 
conflagration  and  ordinary. 

The  Company  method  is  to  make  up  a different  tabulation,  and 
to  shift  items  here  and  there,  and  then  to  draw  off  percentages  and 
partial  figures  of  one  kind  and  another,  so  that  when  they  present 
these  emasculated  statistics,  they  may  indeed  express  accurately  the 
results  of  such  calculations,  but  those  calculations  are  not  designed  to 
show  and  do  not  show  the  whole  state  of  the  case. 


EFFECT  OF  ERROR 

Through  a clerical  error  in  transcribing  the  original  copy  of  this 
table,  the  item  “Paid  for  Dividends”  was  entered  as  $340,000,000 
instead  of  $240,000,000,  substituting  a 3 for  a 2.  This  error  appears 
in  the  first  edition  of  the  Monograph  and  in  the  comment  upon  it. 
It  is  not  material  to  the  argument  excepting  as  to  the  percentage  of 
profit. 

The  fact  of  profit  remains.  The  figures  of  Mutual  companies  are 
properly  included,  because  they  are  included  in  any  determination  of 
the  inadequacy  or  equity  of  rates.  They  are  included  by  THE  SPEC- 
TATOR, and  must  be  included  when  quoting  THE  SPECTATOR. 


16 


NO  SHRINKAGE  IN  CAPITAL  OR  SURPLUS 


To  state  the  facts  in  another  way,  utilizing  the  same  SPECTA- 


TOR table : 

Capital,  1910  $ 94,734,035 

Capital,  1901  69,930,423 

Gain  in  Capital $ 24,763,612 

Net  Surplus,  1910 $257,529,237 

Net  Surplus,  1901 162,083,426 

Gain  in  Surplus $ 95,445,811 

This  shows : 

1910  Gain  in  Capital $ 24,763,612 

1901  Gain  in  Net  Surplus 95,445,811 

Total $120,209,423 


There  has  certainly  been  no  shrinkage  in  capital  and  no  shrink- 
age in  surplus  in  the  ten-year  period,  although  that  period  includes 
all  of  the  great  conflagrations  mentioned — San  Francisco,  Baltimore, 
Toronto,  Rochester,  Paterson,  Chelsea,  etc. 

How  can  it  be  true  that  a business  which  has  retained  its  capital 
and  satisfied  its  stockholders  so  that  the  value  of  the  stocks  of  these 
companies  is  today  approximately  3 to  1 in  the  market,  is  an  unprof- 
itable business  ? 

How  can  it  be  true  that  the  companies  make  no  money  in  under- 
writing hut  make  “great  profits”  out  of  the  “banking  business,” 
when  these  particular  companies  make  their  reports  under  oath  as 
above  indicated? 


RATIO  OF  PREMIUMS  TO  INVESTMENT  EARNINGS 


The  tabulation  shows : 

Total  income  for  the  ten  years $3,055,370,182 

Total  net  premiums  for  the  ten  years 2,788,020,735 


Margin  $ 267,349,447 


That  margin  is  all  that  the  compilation  shows  could  possibly  have 
been  received  from  the  “Banking  Department”  or  “Investment  De- 
partment,” an  average  of  $26,700,000  per  annum. 

The  net  premium  income  was  an  average  of  $278,800,000. 

This  shows  the  relative  importance  of  “Investment  Income”  and 
1 1 Premium  Income,  ’ ’ according  to  this  table. 

We  do  not  accept  any  responsibility  for  THE  SPECTATOR  table 
excepting  to  quote  it  correctly.  We  do  not  try  to  reconcile  it  with 
the  Gain  and  Loss  Exhibit,  because  we  are  unable  to  do  so. 


17 


CAPITAL  AND  SURPLUS 

Refer  now  to  the  State  Reports,  Table  No.  1,  showing  capital, 
surplus  and  percentage  of  capital  and  surplus  to  amount  at  risk. 

(Table  page  19,  also  Graphic  Charts  I and  II) 

When  a railroad  company  reports  its  earnings  as  a certain  per- 
centage, that  percentage  is  figured  upon  capital. 

When  the  insurance  companies  figure  their  earnings,  and  report 
that  they  have  made  no  money,  the  percentage  is  figured  upon  the 
amount  at  risk,  not  upon  the  capital. 

The  seventy-two  millions  of  capital  in  this  country  (1910)  carried 
an  amount  of  insurance  at  risk  in  1909  and  1910  averaging  in  Con- 
necticut over  thirty-nine  thousand  millions,  and  in  New  York  over 
forty-two  thousand  millions. 

A very  small  percentage  upon  forty  thousand  millions  is  a very 
fair  percentage  upon  seventy-two  millions. 

After  paying  every  expense  and  extravagance  and  all  the  losses 
of  conflagrations  and  normal  fire  waste,  this  seventy-two  millions  of 
capital  or  less  has  put  by  in  surplus,  after  paying  dividends,  an  aver- 
age of  over  eighteen  million  dollars  per  year,  in  round  figures. 

RECORD  SINCE  ORGANIZATION 

Page  7 of  the  Convention  form  of  Annual  Report  discloses  the 
following  items: 

No.  3.  Gross  premiums  received  from  the  organization  of  company. 

No.  4.  Total  losses  paid  from  organization  of  company. 

No.  5.  Total  dividends  declared  since  commencing  business:  (a) 
cash;  (b)  stock. 

The  tabulated  result  of  these  inquiries  has  not  been  published, 
but  an  examination  of  the  separate  reports  of  a large  number  of 
companies  shows  that  almost  the  entire  amount  of  surplus  is  earned 
surplus,  accumulated  out  of  profits  in  the  business.  Surplus  earn- 
ings over  and  above  losses  and  expenses  and  dividends.  The  percent- 
age of  contributed  surplus  remaining  in  the  tabulation  is  so  small 
as  to  be  negligible  for  purposes  of  comparison.  It  is  far  less  than 
the  amount  of  stock  dividends  which  have  been  declared  out  of 
savings. 

It  is  impossible  to  maintain  that  a business  which  has  accumu- 
lated such  a vast  surplus  over  and  above  all  losses  and  expenses 
and  dividends  is  an  unprofitable  business. 

Why  should  the  State  of  Illinois  accept  the  insurance  companies’ 
statistics  without  investigation  and  without  analysis? 

The  conflict  between  the  statistics  and  statements  published  by 
the  insurance  companies  for  public  consumption,  and  the  tabula- 
tions from  the  Gain  and  Loss  Exhibit,  ought  to  be  investigated  in 
the  interest  of  the  public  and  the  property  owners  and  of  the  com- 
panies themselves.  If  one  set  of  figures  is  right,  the  other  set  is  not 
right. 


18 


FROM  TABLE  I.  STATE  REPORTS 


CONNECTICUT 


Stock  Companies — Domestic  and  Foreign 
(Excluding  Mutuals) 


Capital 

Surplus 

Capital  and 
Surplus 

% Capital 
and  Surplus 
to  Amt. 
Risk 

1909 

Conn.  Co’s 

$ 11,000,000 

$ 22,052,569 

$ 33,052,569 

.57 

Other  States 

49,807,067 

96,375,132 

146,182,198 

.65 

Foreign  Co’s 

5,000,000 

25,736,272 

30,736,272 

.34 

$ 65,807,067 

$144,163,973 

$209,971,039 

.52 

1910 

Conn.  Co’s 

$ 12,700,000 

$ 24,876,069 

$ 37,576,069 

.57 

Other  States 

53,600,000 

102,062,322 

155,662,322 

.65 

Foreign  Co’s 

6,000,000 

26,313,390 

32,313,390 

.34 

$ 72,300,000 

$153,851,780 

$226,151,781 

.52 

NEW  YORK 


1909 

N.  Y.  Co’s 

$ 21,050,004 

$ 63,351,265 

$ 84,401,269 

Other  States 

47,962,067 

62,475,907 

110,437,974 

Foreign  Co’s 

(Not  rept’d) 

38,394,690 

(Not  rept’d) 

$164,221,862 

1910 

N.  Y.  Co’s 

$ 23,100,004 

$ 65,883,997 

$ 88,984,001 

Other  States 

52,520,000 

69,176,492 

121,696,492 

Foreign  Co’s 

(Not  rept’d) 

42,090,992 

(Not  rept’d) 

$177,151,481 

MASSACHUSETTS 


1909 

Mass.  Co’s 

$ 

3,600,000 

$ 6,059,204 

$ 9,659,204 

Other  States 

62,357,067 

119,214,881 

181,571,948 

Foreign  Co’s 

8,400,000 

26,082,407 

34,482,407 

$ 

74,357,067 

$151,356,492 

$225,713,559 

1910 

Mass.  Co’s 

$ 

4,100,000 

$ 6,410,832 

$ 10.510,832 

Other  States 

67,499,999 

126,760,343 

194,260,342 

Foreign  Co’s 

9,700,000 

27,944,273 

37,644,273 

$ 

81,299,999 

$161,115,448 

$242,415,447 

19 


These  two  examples,  one  of  them  taken  from  the  summary  of 
the  Gain  and  Loss  Exhibit,  and  giving  the  total  results  of  the  busi- 
ness since  the  organization  of  the  companies,  the  other  giving  the 
underwriters’  own  figures  as  reported  by  THE  SPECTATOR  Year- 
Book  of  ten  years’  results,  showing  what  money  they  started  with, 
what  they  took  in,  what  they  paid  out,  and  what  they  have  left, 
are  a complete  disproof  of  the  methods  and  statements  of  the  under- 
writers which  purport  to  show  that  the  business  has  not  been  profit- 
able. 

With  such  a showing  as  this,  why  should  not  the  State  of  Illinois 
establish  some  authority  which  will  investigate  and  ascertain  in  the 
public  behalf  what  the  facts  really  are? 

Why  should  the  State  of  Illinois  accept,  unchallenged,  the  un- 
supported and  unproved  statements  of  the  underwriters,  when  those 
statements  are  so  widely  at  variance  with  the  statements  under  oath 
made  by  the  same  companies  in  other  States? 


NOT  BANKING  BUSINESS 

The  Gain  and  Loss  Exhibit  has  demolished  the  fiction  that  the 
companies  make  money  in  their  “ Banking  Business.” 

There  is  no  such  thing. 

They  could  not  divert  a dollar  from  their  insurance  business  to 
the  Banking  Business  without  acccounting  for  it  to  the  Insurance 
Department  of  the  State.  Their  own  charters  and  the  laws  of  the 
States  make  it  unlawful  for  them  to  engage  in  the  Banking  Business. 

It  was  a false  pretense  always,  but  in  any  event  it  has  now  to- 
tally disappeared. 

There  is  not  a column,  nor  a figure,  nor  a dollar,  available  to  wear 
the  mask  of  “Banking  Profit.”  All  of  the  funds  of  the  company 
are  shown  as  part  and  parcel  of  the  Insurance  Business. 

If  diverted  from  that  business  to  the  “Banking  Business,”  they 
could  not  appear  upon  any  State  Report  as  a resource  of  an  Insur- 
ance Company.  They  are  funds  which  the  company  must  hold  to 
meet  outstanding  obligations,  and  as  a function  of  the  Insurance 
Business. 

Befuddled  thinking  or  intentional  deception  must  not  be  per- 
mitted to  cause  or  excuse  overcharge  in  the  rate  of  premium,  or 
wanton  waste  in  the  business  methods  of  the  companies. 


20 


WHY  SHOULD  THE  STATE  OF  ILLINOIS  CONTROL 
THE  MAKING  OF  FIRE  INSURANCE  RATES? 


Because  the  fire  insurance  business  has  become  “impressed  with 
the  public  use.” 

Because  the  power  of  the  State  is  necessary  to  overcome  the  power 
of  the  organized  insurance  interests,  which  are  dealing  unjustly  with 
Illinois. 

Because  the  courts  have  decided  that  the  State  has  the  right 
and  power. 

Because  other  States  have  exercised  that  right,  and  their  citizens 
have  been  benefited  by  it  without  doing  injustice  to  the  insurance 
companies. 

Because  it  is  impossible  for  the  buyers  of  insurance  to  protect 
themselves  without  the  aid  of  the  State. 

Because  the  record  shows  that  the  insurance  companies  have  ex- 
acted from  the  people  of  Illinois  far  more  than  their  fair  share  of 
the  insurance  tax. 

Because  rates  as  now  made  are  not  equitable  and  are  not  ad- 
justed to  fire  loss. 

Because  the  insurance  companies  do  not  keep,  and  never  have 
kept,  statistics  which  are  adequate  to  form  a basis  for  the  estab- 
lishment of  just  and  equitable  rates. 

Because  the  principle  upon  which  rates  are  now  established  is 
merely  the  commercial  principle  of  making  a rate  that  will  get  and 
hold  the  business  at  a profit  to  the  underwriters,  regardless  of  its 
injurious  effect  upon  individuals,  upon  commerce,  and  upon  the  life 
and  prosperity  of  the  community. 

Because  the  present  system  of  making  rates  tends  to  perpetuate 
fire  waste  and  to  perpetuate  the  awful  hazard  of  conflagrations. 

Because  a proper  system  of  rating  and  enforcing  rates  would 
tend  to  reduce  fire  waste  and  loss  of  life  and  property. 

Because  the  excessive  charges  which  are  now  exacted  by  the  un- 
derwriters in  Illinois  do  not  benefit  the  people  of  Illinois  in  any  re- 
spect. The  excess  funds  so  collected  are  dissipated  in  unnecessary 
and  abnormal  expenses,  in  rate  wars,  discriminations,  and  marauding 
campaigns,  to  such  an  extent  that  the  resources  of  the  companies 
and  their  loss-paying  ability  are  not  strengthened,  but  are  in  fact 
weakened.  The  method,  therefore,  benefits  nobody  and  is  an  injury 
to  the  public,  which  only  the  State  can  correct. 

Because  the  underwriters  themselves  admit  the  faults  and  defects 
of  existing  methods,  but  declare  that  without  the  aid  of  the  State 
they  are  unable  to  correct  or  to  reform  these  conditions. 

Because  while  the  statistics  and  tabulations  of  the  underwriters 
are  inaccurate  and  misleading  and  inadequate  for  the  purpose  of 
making  equitable  rates,  the  service  which  they  might  render  to  the 
public  is  withheld  from  the  public  knowledge  and  is  utilized  by  the 
underwriters  for  their  personal  profit  at  the  expense  of  the  property 
owner. 


21 


Because  the  underwriters  have  banded  themselves  together  in 
secret  organizations,  under  heavy  penalties,  not  only  of  fines,  but  of 
social  and  business  ostracism  or  boycott,  as  a means  of  maintaining 
their  unfair  grasp  upon  the  people. 

Because  fire  insurance  premiums  are  a tax  levied  by  conspirators, 
without  the  knowledge  or  consent  of  property  owners. 

Because  the  underwriters  claim  that  the  laws  of  the  State  give 
the  property  owner  no  power  to  question  or  review  a rate,  however 
unjust,  and  afford  no  tribunal  or  official  before  whom  the  property 
owner  may  apply  for  remedy. 

Because  other  States  and  municipalities,  and  organizations  within 
other  States,  have  rights  of  review  and  redress,  which  are  not  granted 
by  the  laws  of  Illinois  to  her  citizens. 

Because  the  citizens  of  Illinois  ought  to  enjoy  every  right  and 
remedy  to  which  the  citizens  of  any  other  State  are  entitled  at  law 
or  in  equity. 

Because  commerce  and  industry  are  now  handicapped  in  Illinois 
as  compared  with  adjoining  and  sister  States,  and  this  handicap 
can  be  removed  by  legislation  similar  to  that  adopted  in  other  States, 
and  which  has  been  found  beneficial  wherever  adopted. 

STATE  FIRE  INSURANCE  BOARD 

If  it  is  the  duty  of  the  Legislature  to  provide  measures  of  relief 
from  existing  fire  insurance  conditions,  the  question  is,  what  form 
shall  that  legislation  take?  The  record  of  the  States  which  have  at- 
tempted any  form  of  regulation  may  serve  as  a guide  in  part.  Where 
the  authority  assumed  by  the  State  has  been  partial  and  feeble,  the 
progress  of  reform  has  been  very  slow  and  unsatisfactory.  WTiere 
the  State  has  assumed  the  initiative,  progress  has  been  rapid  and 
economic  and  effective. 

The  practical  thing  is  to  create  a State  Board  having  power  of 
initiative  charged  with  the  duty  of  investigating,  of  controlling,  of 
revising,  and  of  standardizing  the  whole  system  in  the  community 
interest. 

Fire  insurance  should  be  treated  as  a community  problem,  not 
as  an  individual  or  company  problem.  Only  the  State  has  authority 
to  treat  it  in  that  way.  A Board  rather  than  a single  Commissioner 
is  an  imperative  condition  of  successful  operation. 

No  single  Commissioner  should  be  charged  with  the  labor  and 
responsibility  of  investigating  and  deciding  upon  the  great  variety 
of  problems  which  are  involved  in  the  different  forms  of  insurance, 
such  as  life,  fire,  casualty,  accident,  tornado,  etc.,  etc. 

The  Commissioner’s  functions  and  responsibilities  should  be  de- 
fined and  he  should  be  a capable  official,  certainly.  If  he  is  also  a 
disinterested  person,  it  might  be  proper  to  include  him  as  a member 
of  the  Board. 

The  Commissioner  acting  alone  must  necessarily  apportion  his 
time  and  attention  between  the  different  forms  of  insurance. 

A Board  of  three  members,  even  with  the  Commissioner  as  a 

22 


member,  would  have  a working  majority  which  might  proceed  with 
its  duty  in  connection  with  fire  insurance  alone. 

A Board  of  this  character  should  be  given  large  responsibilities 
and  large  freedom  of  action,  and  to  it  should  be  referred  all  of  the 
minor  questions  relating  to  rates,  rules,  practices,  expenses,  statistics, 
etc.  In  that  manner  co-operation  will  be  established  between  the 
communities  and  the  States  and  the  Federal  Government,  and  co- 
ordination of  facts  and  standards,  etc.,  will  result. 

This  Board  should  be  given  ample  authority  to  determine  the 
reasonableness  of  a rate,  and  to  establish  that  rate,  after  a reason- 
able hearing. 

It  should  have  the  power  to  call  upon  the  companies  or  corpora- 
tions or  voluntary  associations  or  individuals  who  exercise  governing 
or  rate-making  powers  to  exhibit  all  documents,  books,  statistics,  etc., 
of  whatever  nature  that  may,  in  the  judgment  of  the  Board,  or  under 
the  operation  of  the  law,  be  necessary  or  useful  for  the  proper  per- 
formance of  its  several  functions.  This  would  give  it  the  power  to 
legalize  existing  rates  and  to  correct  them  in  detail  after  investiga- 
tion, thus  avoiding  any  abnormal  or  undesirable  dislocation  of  ex- 
isting business  relations. 

The  Board  should  have  the  power  of  determining  and  standard- 
izing schedules  or  other  systems  of  rating  fire  hazard,  and  determin- 
ing a reasonable  rate. 

The  Board  should  have  the  right  to  appeal  to  the  court  in  deter- 
mining its  own  authority  and  the  authority  of  associations,  corpora- 
tions, or  individuals,  with  which  it  may  have  occasion  to  deal.  With 
this  authority  it  would  be  able  to  determine  very  promptly  its  own 
rights  and  authority  and  that  of  those  claiming  conflicting  or  supe- 
rior rights  and  authority. 

This  method  of  solving  the  problem  by  the  creation  of  a Bating 
Board  will  place  this  State  in  the  front  rank  instead  of  the  rear 
rank  of  current  movements.  The  experience  of  other  States  along 
similar  lines  and  the  experience  of  this  state,  as  time  goes  on,  may 
lead  to  amendments  or  modifications  of  the  plan. 

Details  of  rates  and  practices  will  be  tested  and  proved  from 
month  to  month  and  year  to  year  by  the  collection  and  tabulation 
of  standardized  statistics,  which  will  be  common  to  the  problem 
in  all  of  the  progressive  States.  This  will  prevent  arbitrary  and  ill- 
considered  action  upon  the  part  of  the  Board  and  minimize  the  effect 
of  errors  of  judgment  either  upon  the  public  or  the  companies  by 
reason  of  the  publicity  which  will  be  given  to  trustworthy  records 
of  the  several  results. 


BASIS  RATE  JUGGLERY 

While  it  is  certainly  difficult  to  make  an  untrained  man  under- 
stand in  a short  time  the  intricacies  of  the  Dean  Schedule,  and 
while  even  experts  are  mystified  by  it,  as  the  testimony  in  the  Mis- 
souri case  plainly  shows,  it  is  very  important  to  get  clearly  in  mind 
that  the  practical  application  of  this  basis  rate  to  cities  and  towns 
and  risks,  utterly  ignores  loss  experience  in  those  cases. 

It  is  in  fact  a “joker”  by  means  of  which  any  jugglery  of  rates 
desired  may  be  effected. 

Mr.  Fetter,  the  expert  independent  rater  in  Missouri,  states  in 
his  testimony  under  oath,  that  while  the  printed  books  contain  only 
tables  from  60  to  120,  he  could  work  out  any  table  which  he  wished 
to  use  either  above  or  below  those  tables  from  20c  to  $4.00,  or  any 
other  figure,  and  still  be  using  “the  principles  of  the  Dean  Schedule.” 
He  distinctly  states  that  he  could  so  manipulate  the  Dean  Schedule 
as  to  produce  any  result  that  he  desired  to  produce,  and  that  it 
would  still  be  the  Dean  Schedule. 

He  not  only  could  do  so,  but  he  actually  had  done  so  in  every 
case,  excepting  in  those  cases  in  which  he  had  been  directed  by  the 
Governing  Committee  to  raise  certain  particular  classes  an  arbitrary 
percentage. 

Practically  the  same  state  of  things  was  testified  to  by  Mr.  Persch, 
the  Illinois  rater;  Mr.  Sellers,  the  Indiana  rater;  Mr.  Waterworth, 
the  St.  Louis  rater. 

The  printed  definition  of  the  Dean  Basis  Rate  is  that  it  is  “the 
residuum  of  unanalyzed  hazard.” 

Mr.  Persch  says  it  is  determined  “by  water  supply  and  fire  pro- 
tection in  a town,  and  by  nothing  else.” 

Mr.  Fetter  says: 

“A  basis  rate  under  the  Dean  Schedule  is  a starting  point  at 
which  we  start,  according  to  the  height  of  the  building,  the  kind 
of  a building,  and  the  location  according  to  fire  protection. 

“When  we  first  started  out  a number  of  years  ago,  we  started 
out  with  an  80  table,  but  that  made  rates  too  high.  We  later 
dropped  to  the  70  table,  got  along  with  that,  and  found  it  still 
to  be  too  high;  and  we  started  to  use  the  60  table.  (Brick 
buildings.)  ” 

Q.  You  changed  tables  as  you  found  the  conditions  justi- 
fied it? 

A.  To  such  risks  as  the  Dean  Schedule  applied. 

Q.  Upon  what  theory  did  you  operate  to  determine  that 
these  rates  were  too  high? 

A.  By  tests;  applications  of  the  ratings  themselves. 

Q.  How  would  you  know  that  you  had  the  rates  high  enough  ? 

A.  By  comparison  with  our  previous  rates  from  time  to  time. 

Q.  Well,  the  theory  of  making  a rate  is  to  produce  a reason- 
able revenue , isn’t  it? 


24 


A.  That  is  my  understanding;  yes,  sir. 

Q.  How  did  you  find  out  that  a reasonable  revenue  had  been 
produced  by  a certain  table  of  rates? 

A.  By  comparison  with  our  previous  rates  that  we  thought 
were  right ; by  comparison  with  rates  in  my  own  office. 

Q.  How  could  you  tell  by  comparing  them  with  the  rates 
what  experience  the  companies  had  had  on  different  classifi- 
cations ? 

A.  I didn’t  know  the  details  of  that  only  by  comparison 
with  the  general  level  of  rates. 

Q.  Were  you  supplied  with  any  figures  from  any  companies 
or  from  any  agencies  to  help  you  in  arriving  at  this  result? 

A.  No;  not  any  specific  figures. 

Q.  Then  it  is  more  a matter  of  guesswork? 

A.  No,  sir;  it  was  a comparison  with  the  previous  rates. 

Q.  But  you  did  not  collect  any  actual  data  upon  which  you 
predicated  the  loss  and  profits  of  the  insurance  companies  of 
the  State? 

A.  I did  not;  no,  sir. 

Q.  Then  you  simply  arrived  at  that  result  by  a general 
conclusion  in  your  own  mind? 

A.  By  the  application  of  those  schedules;  yes,  sir. 


Please  note  the  utter  disregard  of  Fire  Protection,  water  supply, 
loss  experience,  insurance  to  value,  classification  of  profitable  and 
unprofitable  rates,  the  effect  of  term  insurance,  cut  rates,  or  any  at- 
tempt to  learn  what  other  raters  were  charging  upon  similar  prop- 
ties  in  other  States. 

It  totally  abandons  the  theoretical  basis  and  justification  of 
schedule,  or  any  other  rating  system.  It  simply  fits  a new  ass’s  skin 
upon  the  same  old  lion. 


Note  how  the  further  testimony  confirms  this: 

Q.  If  you  were  going  to  Tennessee  and  were  authorized  to 
put  in  force  and  effect  the  Dean  Schedule,  what  table  would 
you  select  for  Tennessee? 

A.  Oh,  I would  start  out  with  any  table  and  see  what  results 
I would  get;  the  general  level  of  rates.  I would  keep  on  testing 
until  I was  satisfied.  If  the  conditions  today  were  too  high,  I 
would  work  until  I got  them  lower.  If  they  were  too  low,  I would 
test  the  tables  until  I got  them  where  1 wanted  them. 

Note:  Where  is  there  a suggestion  in  all  this  that  Fetter 
had  any  conception  of  anything  like  “science”  in  rating,  or  any 
intention  whatever  of  adjusting  the  rate  to  loss  experience? 

He  rated  Kansas  City,  but  he  compiled  no  statistics  before  doing 
so,  and  made  no  attempt  to  do  so  afterward. 


25 


Mr.  Dudley,  of  the  Union  (on  June  26,  1906),  directed  him  to 
raise  Flouring  Mills  20% ; Boot  and  Shoe  houses  40% ; Saw  Mills 
15%,  and  Summer  Hotels  25% ; and  he  thereupon  issued  a circular 
to  that  effect. 

He  was  a professional  “Independent  Rater;”  but  without  any 
change  in  any  condition  of  Water  Supply  or  Fire  Protection  or  of 
any  particular  hazard  in  a risk  or  in  a class,  he  promulgated  that 
great  advance  over  his  published  rates. 

HOW  FETTER  CLASSIFIES  TOWNS 

Q.  How  are  towns  classified? 

A.  Oh,  by  their  fire  protection  and  ordinances. 

Q.  That  is  fully  your  theory,  is  it? 

A.  Well,  some  other  details  may  enter  into  a town  that  I 
can’t  recollect  now. 

Q.  Do  you  classify  at  all  in  regard  to  fire  loss  ratio? 

A.  No;  not  the  classification  of  a town. 

Q.  You  pay  no  attention  to  fire  loss? 

A.  No,  sir. 

Q.  Pay  no  attention  to  that  in  classifying  a town? 

A.  No,  sir. 

Q.  In  fixing  a rate,  do  you  study  fire  losses? 

A.  Well,  I can’t  say  that  I give  it  a general  study,  more 
than  a question  of  whether  rates  are  getting  too  low  or  getting 
too  high. 

Q.  Well,  do  you  study  fire  losses  in  fixing  a rate.  That  is 
the  specific  question. 

A.  Well,  I cannot  say  that  I do. 

Q.  You  do  not  allow  the  fire  losses  to  enter  into  fixing  the 
rate  at  all? 

A.  No,  sir;  not  as  to  one  locality. 

Q.  In  making  a basis  rate,  or  fixing  a rate  of  any  kind,  you 
have  no  fire  experience  to  which  you  refer? 

A.  No;  only  the  fact  that  the  companies  in  general  are  mak- 
ing a profit  in  a State  or  not. 

Q.  Could  you  justify  and  defend  any  of  the  rates  that  you 
made? 

A.  No ; only  taking  as  a foundation  the  general  level  and  the 
fact  that  they  were  considered  in  that  proportion  in  that  schedule. 


Reams  of  this  kind  of  thing  could  be  compiled,  all  confirming  the 
claim  which  I have  made  that  the  ’’Dean  Basis  Rate”  is  not  what  it 
purports  to  be,  and  that  it  may  be  and  is  manipulated  and  juggled 
with  everywhere  by  everybody  to  produce  the  same  result  that  had 
been  obtained  by  existing  schedules,  if  that  level  would  hold  the 
business,  and  was  as  high  as  “Underwriting  Judgment”  (not  of  the 
rater  but  of  the  Union  Governing  Committee)  decided  the  property 
owner  would  pay. 


Words  could  not  make  it  clearer  that  the  public  is  deliberately 
and  purposely  and  systematically  deceived  by  fair  sounding  words, 
and  a pretense  of  mathematical  and  scientific  measurement  of  hazard 
applied  to  every  State,  town  and  risk,  while  in  fact  the  “Independent 
Rater”  is  a tool  of  the  companies  who  has  little  or  no  underwriting 
knowledge  or  experience,  who  keeps  no  statistics  of  loss  experience, 
and  would  not  know  what  they  meant  if  he  did  keep  them.  He 
wouldn’t  use  them  if  he  had  them,  not  because  they  would  not  be 
useful  and  valuable  if  kept  and  used  in  the  interest  of  the  public, 
but  precisely  because  the  companies  do  not  want  them  to  be  used  in 
the  public  interest.  That  is  all  there  is  to  it. 

The  Rater  is  no  “expert,”  except  in  making  the  new  schedule 
produce  the  same,  or  a greater,  premium  than  the  old.  In  many 
places  that  rate  had  been  loaded  up  with  the  “pink  slip”  charge. 
When  that  charge  had  become  so  offensive  to  the  public  and  dangerous 
to  the  companies  that  the  companies  feared  to  continue  it  as  such, 
they  interred  it  privately  and  decently  in  the  Dean  Schedule  appli- 
cation, and  hid  it  from  sight  without  experiencing  any  pang  of  lost 
income. 


SUPPLEMENTARY  TOPICS 

The  foregoing  statement  and  argument  has  been  concerned  mainly 
with  a broad  view  of  the  situation  as  it  exists,  and  of  the  rights 
and  responsibilities  of  the  parties  in  general  terms. 

Methods  of  meeting  the  conditions  and  of  bringing  about  the 
needed  reforms  will  involve  a vast  amount  of  detail. 

If  the  Committee  decides  that  it  is  the  function  of  the  State  to 
afford  some  measure  of  relief  through  legislation,  I desire  on  behalf 
of  my  own  interests  and  of  many  other  interests  which  I represent 
to  present  further  facts  and  figures  and  argument  showing: 

1.  The  injustice  practiced  by  the  underwriters  upon  the  people 
of  Chicago  and  of  Illinois. 

2.  The  injustice  of  rates  exacted  in  this  State  when  tested  by 
loss  experience. 

3.  The  injustice  of  rates  when  tested  by  comparison  with  similar 
hazards  and  rates  in  other  States. 

4.  The  malign  influence  of  the  power  of  the  several  voluntary 
boards  and  associations  of  underwriters  upon  the  life  and  property 
interests  of  the  entire  State. 

5.  The  responsibility  of  the  underwriters  through  their  practices 
for  a large  part  of  the  fire  waste  and  of  the  loss  of  life. 

6.  The  responsibility  of  the  underwriters  for  a large  proportion 
of  over-insurance  and  incendiarism  and  arson. 

7.  The  injustice  of  the  present  system  of  adjustment  of  fire 
losses,  together  with  suggestions  for  reforming  such  methods. 


27 


8.  The  importance  of  requiring  that  the  Fire  Marshal  law  shall 
be  administered  in  the  interest  of  all  the  people,  and  not  of  a class. 

9.  The  need  for  reform  in  the  matter  of  taxes  and  burdens  levied 
upon  insurance  companies,  all  of  which  finally  come  out  of  the  policy- 
holder, together  with  a profit  upon  them  which  remains  in  the  pock- 
ets of  the  insurance  companies. 

10.  The  importance  of  revising  building  codes,  rules,  and  ordi- 
nances, with  a view  to  their  economic  value  in  the  conservation 
of  property  and  life. 

11.  The  importance  of  treating  fire  hazard  as  a community  prob- 
lem, rather  than  as  an  individual  problem. 

12  The  importance  of  devising  and  introducing  methods  to  nor- 
malize the  hazard  of  cities  and  to  eliminate  the  conflagration  hazard. 

13.  The  evil  influence  upon  the  business  and  upon  the  com- 
munity of  the  present  system  of  appointing  and  compensating  agents, 
including  the  effect  thereof  upon  fire  waste  and  rates. 

14.  The  hopelessness  of  expecting  the  underwriters  and  agents 
to  reduce  expenses  and  extravagances  and  profits  without  pressure 
from  the  outside. 

15.  The  concealed  purpose  of  the  underwriters  in  the  formation 
of  so-called  Fire  Prevention  Associations,  which  seek  to  distract  the 
attention  of  the  public  from  the  excessive  cost  and  profit  of  the  busi- 
ness by  raising  a great  hue  and  cry  over  Fire  Waste,  which  is  only 
one  element  of  the  problem. 

16.  The  fallacy  of  the  claims  of  the  underwriters  either  that 
rates  are  adjusted  upon  the  basis  of  loss  experience  or  that  they 
always  give  adequate,  or  even  any,  concession  in  the  rate  for  im- 
provement in  the  hazard. 

17.  The  imperative  necessity  that  the  State  take  the  initia- 
tive in  establishing  standards  of  practices,  requirements,  rates,  sta- 
tistical and  financial  records,  adjustment  of  loss,  revision  of  legisla- 
tion in  the  community  interest,  and  relief  of  the  individual  from  the 
oppresssive  power  of  conspiracy,  in  whatever  form. 


28 


NEW  YORK  STATE  FACTORY  INVESTIGATING 
COMMISSION 


IMPERILED  LIVES 

The  Commission,  consisting  of  nine  members,  began  its  hearings 
in  New  York  City,  October  10,  1911.  The  stenographer’s  report  of 
the  testimony  covers  more  than  thirty-five  hundred  pages,  and  in- 
cludes the  testimony  of  a large  number  of  experts  and  specially 
trained  men,  as  well  as  others. 

This  testimony  is  the  latest  expert  thought  up  to  date  touching 
upon  the  interest  which  the  community  and  the  public  has  in  the 
problem  of  the  safety  of  life  and  property  from  fire.  It  should  have 
the  careful  consideration  of  any  person  or  Committee  who  may  be 
considering  similar  problems. 

At  the  suggestion  of  the  Committee,  I submitted  in  writing  the 
following  sketch  cr  outline  of  a practical  method  of  treating  the 
problem  from  the  community  standpoint. 

BROAD  PRINCIPLES 

The  following  suggestions  are  merely  illustrative  of  the  broad 
principle  that  it  is  entirely  practicable  to  find  ways  to  conserve  life 
and  property  without  encountering  economic  difficulties,  without 
confiscating  property,  without  checking  the  growth  of  the  city,  with- 
out causing  the  removal  of  existing  industries,  or  the  wasteful  de- 
struction of  existing  buildings.  In  fact,  the  community  interest  is 
overwhelmingly  benefited,  and  no  worthy  private  interest  is  sacri- 
ficed. It  is  merely  a matter  of  readjustment  along  economic  lines, 
and  with  an  economic  profit  assured  in  advance  amounting  to  an 
enormous  sum  of  money,  as  well  as  tv  the  conserving  of  thousands 
of  lives  every  year. 


NORMALIZED  HAZARD 

Some  consideration  has  been  given  to  exposure  hazards  and  sweep- 
ing fires,  but  no  one  seems  to  have  proposed  the  treatment  of  fire 
hazard  as  a unit,  regardless  of  the  ownership  of  the  property.  The 
units  utilized  have  been  single  buildings,  and  to  some  extent  groups 
of  buildings,  but  the  treatment  of  them  has  not  been  sufficiently 
comprehensive. 

It  is  perfectly  practicable  to  treat  fire  hazard  by  single  blocks 
or  by  areas  of  exposing  hazards  as  units  of  consideration,  and  to  pro- 
vide means  of  protection  to  life  and  property  by  voluntary  or  man- 
datory co-operation  of  owners,  and  by  this  means  greatly  reduce  the 
cost  and  greatly  increase  the  savings  at  the  same  time  that  the 
public,  or  to  use  another  phrase,  the  “community  interest,”  is  being 
more  adequately  cared  for. 

Let  me  use  the  City  of  Louisville  as  an  example.  A careful  in- 
vestigation of  the  Sanborn  maps  and  a physical  investigation  of  the 


29 


properties  shows  that  the  protection  of  three  groups  of  property, 
divided  into  one  group  of  five  blocks,  one  of  four  and  one  of  three, 
will  practically  eliminate  the  hazard  of  sweeping  fire,  and  as  to  in- 
tegral fires  will  reduce  the  hazard  to  normal — that  is  to  say,  to  a 
size  and  force  which  will  almost  certainly  be  controlled  by  the  force 
of  prevention  or  extinguishment  which  can  be  brought  to  bear  upon  it. 

On  the  financial  side  this  would  represent  quite  an  expenditure 
of  money,  but  the  compensating  elements  of  cost  of  reconstruction 
and  equipment,  as  compared  with  the  cost  of  the  non-co-operative 
effort  at  protection,  will  greatly  overbalance  it.  The  cost  of  indem- 
nity will  also  greatly  decrease.  The  cost  of  watch  service,  fire  de- 
partment, and  water  supply  will  be  greatly  reduced.  The  interrup- 
tion of  local  traffic  and  transportation  will  be  greatly  minimized.  As 
a corollary,  the  safety  of  life  and  limb  will  be  greatly  promoted. 

OBJECTORS 

The  opposition  of  organizations  of  local  agents  must  be  anticipated 
and  overcome.  While  there  are  local  agents  who  have  breadth  of 
view,  both  from  a business  and  a humanitarian  standpoint,  who  would 
favor  such  improvements  in  conditions,  the  majority  of  those  now 
profiting  by  the  condition  of  hazard  and  loss  through  some  form  of 
rake-off  in  the  premium  will  be  adverse  to  the  proposition,  because 
a shrinkage  in  premium  income,  however  occcasioned,  will  be  evi- 
denced in  their  pocketbooks. 

The  activity  of  this  majority  will  manifest  itself  partly  in  the 
effort  to  maintain  a level  of  rates  above  the  legitimate  level  which 
is  correlated  to  fire  waste.  This  is  a serious  obstacle,  because  a mu- 
nicipal or  State  or  department  regulation  which  calls  for  a capital 
expenditure  on  the  part  of  the  property  owners  may  be  resisted  by 
the  property  owner  on  the  ground  that  it  is  uneconomic,  and  because 
the  owner  cannot  afford  the  expenditure.  If,  on  the  other  hand, 
it  can  be  shown  him  that  he  will  recover  out  of  the  savings  in  his 
insurance  premium  within  a short  period,  say  of  three  to  five  years, 
the  entire  capital  expenditure  and  thereafter  will  realize  an  equiva- 
lent saving  year  by  year  upon  his  insurance  premiums,  all  as  velvet, 
his  resistance  will  be  minimized  or  eliminated.  An  overcharge  in  the 
rate  such  as  the  local  agent  seeks  to  establish  and  maintain  therefore 
becomes  a very  important  element  in  the  problem  and  one  which 
must  be  reckoned  with. 

BURDEN  OF  PROOF 

In  Kentucky  we  mean  to  overcome  the  opposition  of  the  agent 
by  taking  the  power  of  initiative  of  rating  out  of  his  hands  and  plac- 
ing it  in  the  hands  of  a State  Rating  Board.  The  board  will  establish 
the  rate  after  investigation  and  a hearing  of  both  sides,  if  that  be- 
comes necessary  in  any  case.  The  insurance  companies  will  only 
have  to  show  the  board  by  their  statistics,  or  in  some  other  convincing 
way,  that  the  rate  established  by  the  board  or  proposed  for  the 
board  to  establish,  is  too  low.  In  such  case  the  board  will  doubtless 


30 


promulgate  another  rate  which  will  be  its  conclusion  as  to  what  is  a 
proper  rate.  The  advantage  of  giving  the  board  the  initiative  is  that 
the  burden  of  proof  that  the  rate  is  too  low  will  be  upon  the  com- 
panies, rather  than  upon  the  assured  or  upon  the  board  or  upon  the 
State.  The  companies  claim  that  they  alone  have  the  statistics  and 
the  experience  and  the  “underwriting  judgment,”  and  that  this  in- 
formation is  not  in  possession  of  the  State  or  of  the  property  owner, 
and  they  refuse  to  give  the  State  or  the  property  owner  the  benefit  of 
that  information.  By  reversing  the  position  of  the  State  and  the  un- 
derwriter, you  will  note,  that  either  the  board  rate  will  become  the 
published  rate  or  the  companies  will  have  been  obliged  to  produce 
their  statistics  and  to  show  that  such  rate  is  inadequate. 

If  we  had  never  had  any  experience  with  the  working  out  of  this 
form  of  problem,  the  question  might  arise  whether  the  effect  might 
not  be  that  the  companies  would  refuse  to  write  the  business  and  the 
property  owner  would  be  without  indemnity.  Fortunately,  in  several 
of  the  States,  notably  Kansas,  Misssouri,  Louisiana  and  Texas,  the 
matter  has  been  put  to  a test  in  many  ways,  with  the  result  that  no 
property  owner  has  suffered  for  want  of  insurance  and  none  of  the 
companies  have  retired  from  the  State  on  account  of  the  rating 
laws.  Furthermore,  in  Kansas,  for  instance,  the  companies  can  ap- 
peal from  the  decision  of  the  Insurance  Commissioner  as  to  a partic- 
ular rate  upon  a particular  property,  and  ask  for  a correction  of 
the  rate  because  of  its  inadequacy.  In  spite  of  the  fact  that  a large 
number  of  reductions  have  been  made  by  order  of  the  Superintendent, 
no  company  has  applied  in  a single  instance  to  have  a rate  declared 
inadequate  by  the  court. 

I mention  this  in  order  that  you  may  not  be  stampeded  by  the 
protest  or  bluff  of  the  underwriters  in  case  such  a thing  should  be 
attempted  by  anybody. 

In  the  State  of  New  York  a different  condition  arises,  but  there 
Superintendent  Hotchkiss  has  held  that  the  Commissioner  has  the 
power  to  review  rates  and  to  determine  their  equity  or  adequacy. 
It  seems  to  me  that  this,  while  not  quite  as  strong  a position  as  the 
Kentucky  positon,  is  adequate  to  meet  the  problem,  and  that  the 
property  owners  will  be  in  position  to  present  their  case,  and  the 
underwriters  will  be  given  an  equal  hearing,  and  that  the  decision 
of  the  Superintendent  will  govern.  In  such  case,  this  element  o 
opposition  of  the  agent  through  the  promulgation  of  an  excessive 
rate  will  be  neutralized. 

DIVERSE  OWNERSHIPS 

Opposition  may  also  be  expected  from  property  owners  by  reason 
of  diverse  interests  on  one  hand  and  because  of  the  cost  of  the  im- 
provements, upon  the  other. 

Take  first  the  question  of  the  separate  ownership  of  the  real 
estate  and  the  contents,  either  of  single  occupancy  or  multiple  occu- 
pancy. In  our  business  we  have  repeatedly  worked  out  this  prob- 
lem for  all  parties  by  obtaining  a contract  under  which  each  party 


31 


contributes  his  savings  toward  the  payment  of  the  cost  of  the  auto- 
matic sprinkler  equipment  and  other  devices  in  fair  proportion  to 
the  benefits  which  will  result  to  each.  This  sometimes  necessitates  a 
change  of  tenants  or  a change  in  the  terms  of  the  lease  or  the  consent 
of  a mortgagee  or  a trustee  for  bondholders,  or  of  other  detail  prob- 
lems; but  they  are  all  perfectly  capable  of  solution  for  the  mutual 
benefit  of  all  parties  when  it  is  the  purpose  of  the  parties  to  get  to- 
gether in  the  interest  of  the  whole. 

Another  class,  either  from  narrowness  of  view,  or  from  selfish- 
ness, or  from  criminal  intent,  may  resist  the  effort.  These  people 
must  yield  to  pressure  from  outside,  exerted  through  the  police  power 
of  the  city  or  State,  through  pressure  of  ordinances  or  administration, 
or  through  pressure  from  surrounding  property  owners.  It  is  per- 
fectly competent  for  the  State  or  the  city  to  say  to  the  objecting 
property  owner  that  he  will  not  be  allowed  to  perpetuate  his  hazard 
at  the  expense  of  adjoining  property  owners  and  occcupants.  Either 
he  must  take  away  the  hazard  or  he  must  normalize  it. 

HAZARD  GROUPS 

Another  class  is  property  of  such  small  value  that  it  seems  like 
confiscation  to  require  its  improvement  in  the  interest  of  the  commun- 
ity. This  is  a case  in  which  by  the  co-operation  of  the  ‘ 4 Hazard 
group,  ’ ’ to  coin  a phrase,  the  contribution  of  all  in  the  group  toward 
the  total  cost  of  the  improvements  may  be  divided  into  portions  cor- 
responding to  the  benefit  to  each. 

To  explain  this  a little  further.  Properties  housing  high  values 
may  be  exposed  by  properties  of  low  values.  It  may  not  be  economic 
for  the  low  value  property,  considered  by  itself,  to  reduce  its  hazard, 
but  it  may  be  highly  economic  for  the  high  value  property  to  pay  all 
or  a portion  of  that  expense  for  the  sake  of  reducing  the  exposure 
hazard  and  the  rate  upon  its  high  value  and  large  volume  of  insur- 
ance. It  may  be  quite  difficult  or  impracticable  to  secure  the  volun- 
tary individual  contribution  of  one  and  another,  but  by  treating  the 
group  of  risks  as  one  risk  from  the  fire  prevention  and  fire  engineer- 
ing standpoint,  it  is  perfectly  practical  to  make  an  aggregate  of  the 
total  cost  of  protecting  that  area  and  to  distribute  the  cost  over  the 
aggregate  of  savings  in  an  equitable  manner  and  by  the  police  power 
of  the  State  or  the  city  to  bring  the  necesssary  presssure  to  bear 
upon  the  individual  to  produce  the  required  result. 

Whether  these  “hazard  groups”  consist  of  single  city  blocks  or 
of  dozens  of  blocks  is  immaterial.  It  is  merely  an  engineering  prom- 
lem  at  the  beginning,  an  actuarial  problem  in  the  middle,  and  a joint 
contract  problem  at  the  end  . 

This  “hazard  group”  system  would  make  possible  the  combining 
of  central  water  supplies  upon  purely  economic  and  engineering 
lines.  Whether  a single  city  block  would  require  one  or  several 
water  tanks,  or  whether  one  water  tank  might  supply  several  city 
blocks,  is  a mere  question  of  engineering  mathematics.  The  problem 
is  simply  to  get  the  highest  practical  efficiency  for  the  least  money. 


32 


All  of  the  questions  of  construction,  maintenance,  supervision,  in- 
spection and  legal  responsibility,  are  mere  matters  of  detail,  which 
any  efficiency  engineer  would  be  competent  to  work  out.  Instead  of 
having  a multiplicity  of  power  units,  a contract  would  be  made  with 
some  central  power  plant  (such  as  a gas  company,  or  electric  light 
company,  etc.)  of  ample  responsibility  and  with  adequate  equipment 
to  handle  the  business.  Such  a centrally  controlled  and  contracted 
supply  would  be  far  better  than  the  multiplicity  of  private  supply 
systems.  There  would  be  far  less  hazard  of  failure  on  the  part  of 
engineers,  watchmen,  petty  equipments,  etc.,  etc.,  under  a centralized 
organization  than  under  the  condition  of  scattered  individual  initia- 
tive. 

It  is  conceivable  that  at  this  point  in  the  problem  the  High 
Pressure  System  might  be  called  upon  to  supply  the  tanks  without 
the  intervention  of  separate  pumps  and  power  installation.  These 
tanks  are  of  definite  capacity,  and  the  demand  which  would  be 
made  upon  the  High  Pressure  System  for  filling  them  and  keeping 
them  full  would  be  easily  controlled  and  regulated  without  imperiling 
the  efficiency  of  the  system  in  any  respect. 

I will  not  go  further  into  detail  at  this  time,  thinking  that  this 
outline  of  suggestion  will  be  a sufficient  stimulus  for  you  to  follow 
up  as  you  may  see  fit. 

HUMAN  SAFETY 

The  same  treatment  suggested  for  “hazard  groups”  in  the  matter 
of  fire  protection  is  equally  capable  of  solving  the  problem  of  human 
safety  by  engineering  and  efficiency  methods.  Fire  escapes,  towers, 
stairways,  balconies,  baffling  walls,  elevator  service,  exits  by  roofs  or  at 
ground  level,  would  find  their  place  in  the  problem  exactly  as  though 
all  of  the  property  were  owned  by  an  individual  or  by  a State  institu- 
tion. It  would  become  simply  a question  of  the  oconomic  way  of 
handling  that  “hazard  group”  of  properties  as  though  it  were  owned 
by  one  man  and  then  bringing  to  bear  the  community  interest  and  au- 
thority in  its  proper  place  and  proportion. 

EXCESSIVE  REQUIREMENTS 

In  addition  to  the  statements  with  reference  to  the  opposition  of 
the  agents  to  a reduction  of  rates,  I beg  to  call  attention  to  the  im- 
portant part  which  is  placed  by  the  requirements  imposed  by  the  in- 
surance companies  in  the  matter  of  sprinkler  equipments,  water  sup- 
ply, watch  service,  etc. 

Even  when  a rate  for  a standard  equipment  appears  to  be  reason- 
able in  amount,  it  may  be  so  modified  by  excessive  requirements  in 
the  matter  of  construction  and  operation,  etc.,  as  to  make  the  installa- 
tion impracticable  or  uneconomic.  It  is  therefore  not  enough  to 
know  the  figures  of  the  schedule  rate  for  sprinklered  buildings.  It  is 
necesssary  to  go  into  all  of  the  other  clauses,  penalties,  requirements, 
etc.,  which  modify  the  application  of  the  rate  in  a particular  case. 

The  importance  of  this  consideration  in  the  handling  of  “hazard 
groups”  is  clearly  manifested  when  you  consider  that  while  a standard 


33 


equipment  of  an  isolated  plant  may  require  a complete  installation 
throughout  the  property,  there  are  many  plants  or  properties  in 
which  minor  installations,  covering  certain  areas  only  and  protecting 
against  certain  hazards  only,  would  reduce  the  risk  to  normal  and 
eliminate  an  exposure  charge  from  properties  which  would  otherwise 
be  loaded  down  with  that  exposure  charge. 

For  example,  a two  or  three-story  building  with  basement  might 
require  only  the  equipment  of  the  basement  or  of  the  basement 
and  first  floor  to  make  it  normal.  The  construction  and  occcupancy 
of  the  additional  floors  up  to  the  fifth  or  sixth  might  be  such  that 
with  the  basement  and  first  floor  protected  in  that  manner,  the  risk 
would  be  normal  and  an  exposure  charge  against  other  properties 
would  thereby  be  eliminated.  In  like  manner,  cases  arise  where  the 
sprinkling  of  a few  points  in  the  building,  such  as  the  roof  areas, 
upper  floors,  etc.,  of  the  Equitable  Building  in  New  York,  and  the 
store  rooms  and  waste  rooms  in  the  basement  might  have  been  suffi- 
cient protection  (or  substantially  so)  to  have  prevented  the  destruc- 
tion of  that  building  from  inherent  fire.  That  is  an  engineering 
problem,  and  the  Equitable  Building  is  used  merely  as  suggestive. 
I could  not  undertake  to  say  without  full  engineering  information 
whether  the  amount  of  installation  indicated  above  would  be  just  the 
right  amount,  or  too  much,  or  too  little.  As  an  illustration,  however, 
it  will  not  be  misleading. 

The  companies  are  in  the  habit  of  giving  credit  for  forms  of 
protection  and  watch  service,  which  they  advocate  as  substitutes  for 
automatic  sprinklers.  These  credits  are  utilized  to  prevent  the  in- 
stallation of  the  more  serviceable  sprinkler  equipments,  and  the 
credits  may  be  very  much  too  large  as  a sop  to  the  property  owner 
for  the  purpose  of  saving  a line  to  the  agent  and  still  maintaining 
a higher  premium  than  a sprinklered  property  would  pay.  There 
are  a great  number  of  these  details  which  are  tools  and  cudgels  in 
the  hands  of  the  underwriters  for  the  purpose  of  “controlling  the 
business.  ’ ’ 

The  testimony  before  the  New  York  Investigating  Committee  uni- 
formly shows  that  the  fire  companies  are  not  in  this  or  in  any  other 
respect  giving  consideration  to  the  safety  of  life.  They  make  no  pre- 
tense to  have  done  so.  They  are  simply  concerned  with  the  business 
of  making  profit  out  of  fire  hazard. 

OPPOSITION  OF  FIRE  DEPARTMENTS 

We  have  encountered  in  almost  every  instance  the  opposition  of 
the  Fire  Department  or  of  the  municipal  authorities  who  have  control 
of  the  Fire  Department  in  any  way. 

Briefly,  the  statement  may  be  made  that  the  Fire  Department  is 
jealous  of  the  substitution  for  a live  fireman  of  a mechanical  device. 
The  opposition  is  continued  even  when  it  is  recognized  by  all  parties 
that  the  mechanical  device  is  both  cheaper  and  far  more  effective. 
The  Fire  Department  interest  usually  frankly  declares  that  it  does 
not  want  to  displace  any  firemen  or  fire  apparatus,  and,  equally,  does 


34 


not  wish  to  have  the  growth  of  the  department  checked.  The  reason 
for  this  is  obvious  enough,  but  it  is  none  the  less  very  unfortunate 
for  the  community.  If  there  are  people  who  make  wages  or  who 
make  a profit  out  of  supplies  or  equipment  of  every  sort  now  paid 
for  upon  the  side  of  the  maintenance  of  fire  department  organizations 
and  water  supply,  etc.,  their  opposition  may  be  taken  for  granted, 
but  that  is  no  reason  why  the  community  should  consent  to  pay  the 
price. 

The  problem  before  your  Committee  is  to  find  an  equitable  level 
of  adjustment,  which  while  conserving  the  community  interest  in 
every  reasonable  way  will  eliminate  as  far  as  practicable  the  malign 
influence  of  greed  and  graft.  , 

Without  going  into  detail  any  further  at  this  time,  I beg  to  call 
your  attention  to  the  fact  that  the  opposition  of  certain  factions  to 
connecting  directly  the  High  Pressure  Water  Systems  to  the  automatic 
sprinkler  equipments  within  the  buildings  and  utilizing  that  high 
pressure  as  the  source  of  supply,  may  be  traced  in  the  great  majority 
of  cases  to  the  selfish  influences  noted  above.  There  is  no  mechanical 
or  engineering  difficulty  or  novelty  in  the  problem  of  utilizing  high 
pressure  for  this  purpose.  The  problem  has  been  worked  out  in 
many  places,  and  its  efficiency  and  safety  can  be  demonstrated  from 
practical  experience. 

THE  POWER  OF  THE  STATE 

I beg  to  call  your  attention  to  the  conclusions  which  follow  log- 
ically from  the  conception  of  fire  insurance  as  a “tax,”  and  the 
courts  and  your  committee  and  the  insurance  companies  all  hold 
that  it  is  a tax.  A tax  is  a governmental  function.  The  war  of  the 
Revolution  was  based  upon  the  objection  to  taxation  without  repre- 
sentation. 

The  power  to  tax  is  practically  the  power  to  destroy  in  the  case 
of  fire  insurance  as  under  other  powers  of  government.  This  is  ex- 
hibited in  the  power  of  the  companies  to  coerce  individuals  and  com- 
munities by  imposing  penalties  or  by  withdrawing  indemnity.  These 
powers  the  companies  have  exercised  in  the  past  in  every  State  or 
city  in  which  legislation  looking  to  their  regulation  in  the  public 
interest  has  been  enacted.  The  fact  that  the  companies  have  aban- 
doned such  action  in  every  case  in  which  they  came  into  conflict 
with  State  legislation,  and  have  gladly  resumed  operation  under  laws 
which  were  declared  by  them  to  be  confiscatory  or  oppressive,  proves 
that  at  least  the  measure  of  regulation  involved  in  these  particular 
cases  while  beneficial  to  the  public  was  not  destructive  to  the  com- 
panies. 

THE  ALABAMA  CASE 

The  United  States  Supreme  Court,  in  the  Alabama  case,  has 
decided  that  “the  fixing  of  insurance  rates  by  self-constituted  tariff 
associations  or  combinations  is  an  evil  against  which  the  public 
should  be  guarded  by  such  legislation  as  the  State  was  competent  to 
enact. 1 9 Also,  “the  business  of  fire  insurance  . . . concerns  a 


35 


very  large  number  of  people,  particularly  those  who  own  property 
and  desire  to  protect  themselves  by  insurance.  We  can  well  under- 
stand that  fire  insurance  companies,  acting  together,  may  have  own- 
ers of  property  practically  at  their  mercy  in  the  matter  of  rates,  and 
may  have  it  in  their  power  to  deprive  the  public  generally  of  the  ad- 
vantages flowing  from  competition  between  rival  organizations  en- 
gaged in  the  business  of  fire  insurance.  In  order  to  meet  the  evils  of 
such  combinations  or  associations,  the  State  is  competent  to  adopt 
appropriate  regulations  that  will  tend  to  substitute  competition  in 
the  place  of  combination  or  monopoly.”  “It  was  for  the  State 
keeping  within  the  limit  of  its  constitutional  powers,  to  say  what 
particular  means  it  would  prescribe  for  the  protection  of  the 
public  in  such  matters.  The  Court  certainly  cannot  say  that 
the  means  here  adopted  are  not  in  any  real  or  substantial  sense  ger- 
mane to  the  end  sought  to  be  attained  by  the  statute.  Those  means 
may  not  be  the  best  that  could  have  been  devised,  but  the  Court 
cannot,  for  any  such  reason,  declare  them  illegal  or  beyond  the  power 
of  the  State  to  establish.  So  far  as  the  Federal  Constitution  is  con- 
cerned, the  State  could  forbid,  under  penalty,  combinations  to  be 
formed  within  its  limits,  by  persons,  associations,  or  corporations, 
engaged  in  the  business  of  insurance  for  the  purpose  of  fixing  rates. ’ ’ 

The  Supreme  Court  decision  upholding,  by  unanimous  bench,  the 
constitutionality  of  the  Corporation  Tax  law  will  also  ultimately  gov- 
ern the  public  relation  of  fire  insurance. 

EMINENT  DOMAIN 

The  power  of  the  companies  to  tax  is  a far  greater  invasion  of 
property  and  private  rights  than  the  right  of  eminent  domain  granted 
to  the  railroad  companies.  Nobody  questions  the  right  of  society  to 
coltrol  companies  and  organizations  to  which  is  granted  the  right  of 
eminent  domain.  How  can  a question  arise  as  to  the  right  of  society 
to  control  the  power  of  voluntary  organizations  to  tax  private  prop- 
erty to  the  extent  of  confiscation  and  the  destruction  of  commerce  and 
industry?  The  Eminent  Domain  right  affects  a small  minority  of 
owners  and  usually  but  a small  portion  of  their  property.  The  insur- 
ance premium  tax  affects  every  owner  of  property,  and  every  im- 
portant commercial  transaction. 


COROLLARY 

The  need  of  reformation  is  made  clear  by  the  reports  of  the  Com- 
missions; the  power  of  regulation  is  made  clear  by  the  courts;  the 
benefit  resulting  to  the  public  through  regulation  is  shown  by  the 
experience  of  every  State  in  which  it  has  been  tried. 

The  right  of  the  public  and  the  property  owner  to  require  such 
legislative  or  administrative  action  as  may  be  useful  or  necessary  to 
protect  the  life  and  property  of  the  citizens  against  the  power  of  the 
organizations  of  insurance  companies  is  the  irresistible  logic  of  this 
situation. 


